Microeconomics Chapter 1

Scarcity

• All resources are limited, some more than other - have to manage these while fulfilling as many economic wants
• Examples:
  • Having to add a minimal amount of armor to fighter jets so they don’t get shot down.
  • Increasing minimum wage pays some people more, but also forces businesses to hire less people
• Economists must see possible consequences - can’t just analyze what is there, have to predict what is not
• Scarcity - limited resources, unlimited economic wants
• Capital goods vs. consumer goods
  • Capital goods: government spending, more money spent on capital goods -→ future economic growth
  • Consumer goods: providing resources to people - helpful to people in short term, but doesn’t encourage long term growth
• Resources: Land, Labor, Capital, and Entrepreneurial ability
• Economics focuses on how to deal with scarcity - macroeconomics deals with entire economy, micro deals with specific markets
  • Cannot do economic experiments, way too many variables in the environment; Make assumptions to explain some things

Production Possibilities Curve

• PPC - Used to see the maximum amount of products that can be created with scarce resources

  

• Anything on the line is and efficient use of resources - Inside is inefficient, outside is not attainable

  • Model makes assumptions as mentioned before - full employment, fixed resources, fixed technology

• Opportunity Cost - Basically the cost of choosing one option over another

  • Example: If you make 10 dollars in a day and decide to go on vacation for 4 days, the opportunity cost is 40 dollars
  • Example: Opportunity cost per unit of wood is 5 units of food/20 units of wood: 1/4 unit of food per unit of wood
  • Minimal opportunity cost = maximum utility
  • Opportunity cost per unit = give up/get
  • Opportunity cost of food = reciprocal of opportunity cost of wood: 4 units of wood per unit of food

• Marginal Analysis - Analyzing benefits vs. costs of economic decisions

  • MR = MC (Marginal Revenue >= Marginal Cost; Otherwise, Opportunity cost is too high)

• Graph shows constant opportunity cost - As you make more wood, you are losing a fixed amount of food, and vice versa

  

• This graph shows increasing opportunity cost: Basically, as you give up more resources for making one thing to make another thing, those resources are less suited to make the new thing, so the opportunity cost is higher

• Economic Growth = growing the curve so it reaches farther out;

  • More resources, or improved resources
  • Better Education
  • Better technology
  • Also possible with international trade

• Some pitfalls in Economics:

  • Bias - “First rule of economics → scarcity, first rule of politics → forget rule one of economics.”